Tax Planning And Portugal’s Non Habitual Residence Scheme
Portugal can be a very attractive country to live in from a tax point of view. The inheritance tax regime is very benign here, and there is no wealth tax. Tax efficient arrangements can lower tax liabilities on your investment and pension income. And if you are a new resident, Portugal’s Non-Habitual Resident (NHR) regime provides beneficial tax treatment for the first 10 years of residence.
To qualify as a non-habitual resident you must not have been tax resident in Portugal for any of the previous five years, and must meet the criteria to be tax resident in the year of application and every year for the 10 year period.
If you are approved for the scheme, employment income earned in Portugal and derived from a “high value added” activity, is taxed at 20%. This compares very well to the top rate of income tax which is 48%.
The regime also provides for tax exemptions for foreign source income, provided certain conditions are met.
Employment income from a foreign source may be exempt from tax in Portugal if it is taxed in the state of source under the rules of a double tax treaty, or, if no tax treaty exists, under domestic legislation and is not regarded as arising from a Portuguese source.
Foreign pension income, for example from UK pension funds, is exempt from Portuguese tax provided it is taxed in another country under the terms of the tax treaty, or is not regarded as Portuguese source income under domestic legislation. In practice, it may be excluded from taxation in both Portugal and the source country. With the new UK pensions freedom, this can provide advantageous opportunities.
In general, other types of income earned outside Portugal, such as investment income are exempt from tax here provided it may be taxed in the state of source under a tax treaty, or it may be taxed under the terms of the OECD Model Tax Convention and is not regarded as arising in Portugal.
This does not apply to income generated in a blacklisted tax haven (including Isle of Man, Channel Islands and Gibraltar).
While the NHR scheme can offer significant tax benefits, it is complex and has pros and cons. It is important to take professional personalised advice to establish what would be most advantageous for you. There are tax advantages to living in Portugal even if you do not use the NHR regime.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
